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The National Association of Insurance Commissioners (NAIC) is taking deep offense to the latest perceived blow by the Financial Stability Board (FSB) to the U.S. system of insurance regulation.

The FSB's critical peer review of the United States, focusing on the state of insurance supervision, was released earlier this week.

The report recognized that state regulators are effective at the two main things they set out to do, which are ensuring effective policyholder protection and ensuring financial solvency, according to Connecticut Insurance Commissioner and head of the NAIC’s International Insurance Relations Committee Tom Leonardi.

Yet, “the FSB dismissed what we do well and focused on other things I do not feel are as important,” Leonardi said in a telephone interview Aug. 29.

The FSB report found that while the state-based regulatory system was effective in assuring policyholder protection and the soundness of individual insurance companies, it lacked a systemic focus and the capacity to exercise group-wide oversight.

Leonardi thinks the FSB believes the U.S. system is too decentralized and in need of a systemic focus. "It also thinks we lack group-wide supervision," he said.

“When someone says we don’t do group supervision, that is just not true,” he added, pointing out that regulators have been doing group supervision for decades and Connecticut, for one, has gone from participating in three supervisory colleges at a Tier One level to participating in 15.

Supervisory colleges are a critical point of how we regulate in this country, Leonardi explained.

But the FSB peer review report, in part, “shows a lack of understanding of what we do,” he said.

With regard to decentralization, Leonardi pointed out that it was instead a centralized structure that proved to be a failure during the economic crisis of 2008, with the Office of Thrift Supervision (OTS) culpable for a failing AIG’s oversight, while the decentralized insurance regulatory system was the system proving itself hardy.

So, the FSB’s premise is “absurd,” Leonardi said.

“I don’t want to pick on the federal regulators, everyone’s professional and doing the best they can, but centralized regulation failed. That did not happen in insurance. Yes, it is decentralized and yes it is not streamlined, but it doesn’t fail,” he said. But now FSB is finding fault with that model, he added.

“Why go from a system that works and go to one that has failed? It is totally illogical," Leonardi said. "The other thing is that you have people from the European Union trying to analyze the U.S. That is like a Yankee fan selected to judge the Red Sox."

The FSB report was prepared by a team chaired by a member from the Deutsche Bundesbank with representatives from the Swiss National Bank, the Japan Financial Services Agency, the EU, the European Systemic Risk Board Secretariat, the Bank of Canada, the Insurance Regulatory and Development Authority of India and others from the FSB who oversee banks.
Stateside, Leonardi was not happy with a U.S. FSB member -- the U.S. Treasury.

The commissioner was appalled that the Treasury did not seem to back the state system. “I would hold up our insurance regulatory system against any system in the world,” Leonardi said. And yet, our “own Treasury is not supporting the state-system,” he added, referring to Treasury’s statement on the report.

“I am disappointed that the U.S. Treasury did not recognize the inherent flaws in the report and the unsubstantiated nature of the report's conclusions,” Leonardi said.

The comment Treasury made on the report two days ago was: “As a member of the FSB, we welcome the evaluation of our financial sector policies by an independent international body. We agree with the findings that the establishment of the Financial Stability Oversight Council (FSOC), the Office of Financial Research and the Federal Insurance Office (FIO) represent important steps to enhance the stability of the financial system.”

The FSB report called for bolstering the role of FIO and imposing a more uniform regime.

"The U.S. authorities should carefully consider and provide recommendations to Congress as to whether migration towards a more federal and streamlined structure may be a more effective means of achieving greater regulatory uniformity,” the report stated. Insurance regualtors said they got a heads up on the report only a day before it was released to the public, and while the NAIC summer meeting was in session, Aug. 26.

“Moreover, the FIO’s current human resources may need to be augmented to fully address the tasks that it has been mandated under DFA. The FIO should also enhance its monitoring of the insurance sector through greater use of non-public information that it is able to access, and be given more resources and powers to be able to address issues and gaps that it identifies," the report stated. It raised eyebrows among some in the insurance sector for the strength of its language, whether they agreed with it or not, and by the fact that an international body was basically telling a U.S. agency, the Treasury, to staff up.

The industry also expressed grave concern for the tone of the FSB's global team's findings, with the Property Casualty Insurers Association of America (PCI) noting, "it may not like our state-based system, not because it is ineffective, but because it is different."

The report found that “state authorities have taken useful steps to improve insurance group supervision; to modernize solvency requirements; and to improve disclosures required for securities lending operations by insurance companies,” but this is clearly not enough.

The FSB has become the new bogeyman for the U.S. insurance sector, regulators and industry alike. In another move, FSB is trying to impose insolvency resolution schemes on global critically important insurers, they say, a new classification that some find goes outside of the scope of what the global community set out to do.

For example, the FSB stated that "insurance companies, insurance groups and insurance conglomerates, including reinsurance companies and reinsurance groups that could be systemically significant or critical if they fail, therefore should be subject to resolution regimes that meet global standards" in the Aug. 28 release of its Assessment Methodology for Key Atttributes of Effective Resolution Regimes for Financial Institutions.